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Excise tax has local medical device makers concerned

The new health care law will bring a raft of changes to the medical industry, including an excise tax on many medical devices, and the tax is causing a lot of consternation in one of Minnesota's most prominent industries.

The medical device excise tax aims to raise $20 billion over ten years when it goes into effect in 2013. It will apply to a wide range of medical device products--from bed pans to stents used for propping open clogged arteries.

Minnesota is teeming with companies that make those products. Med tech giants Medtronic, Boston Scientific, St. Jude Medical, and many smaller firms have operations in the state.

"Minnesota is going to take about 25 percent of the hit on the total tax levied against the medical technology industry," said Don Gerhardt, the chief executive of LifeScience Alley, a Minnesota-based trade group representing several industries, including medical device makers.

“Minnesota is going to take about 25 percent of the hit on the total tax levied against the medical technology industry.”

Don Gerhardt, LifeScience Alley

According to LifeScience Alley, Minnesota has the highest per capita med tech employment of any state. That makes Gerhardt worried about the impact of the excise tax here.

Other parts of the medical sector, such as hospitals and pharmaceutical companies, are expected to benefit as more people have insurance to pay for medical products and services. But Jan Wald, an analyst with Noble Financial Group, said people who typically need medical devices already have insurance, often through Medicare.

"Given that, they're not really going to benefit because if you look at the number of new people that companies like Medtronic, St. Jude, and Boston are going to get, is really going to be quite small," Wald said.

So, revenues from new customers might not do much to offset the companies' excise tax burden.

An analysis by MassDevice.com, an online business journal covering the medical device industry, shows that big device makers like Medtronic will shoulder the greatest excise tax burden. If the tax had been in effect last year, Medtronic would have owed $336 million, the highest tab of the companies examined.

"Something like 80 to 90 percent of the entire tax burden on the industry will be borne by its largest players," said Brad Perriello, the editor of MassDevice.com, which did the analysis.

Last week, Medtronic CEO Bill Hawkins was quoted by the Wall Street Journal, saying that the excise tax would lead to the loss of 1,000 jobs. A Medtronic spokesman said in an email that the statement was taken out of context; Medtronic does not have plans to eliminate jobs as a result of the health care reform law.

The spokesman said Hawkins meant the industry as a whole would lose jobs, and that Medtronic is worried about the impact of the excise tax on device makers large and small.

Brad Perriello of MassDevice.com said, given how big Medtronic's profits are, it can swallow the excise tax pill without too much trouble.

"I think the real impact is going to be on the mid-sized and smaller companies, where profit margins are a lot more narrow, and in some cases are so narrow that the effect of the tax will push a small minority of the companies from black to red," Perriello said.

The excise tax applies to revenues--not profits--so even fledgling companies that have not yet turned a profit will have to pay it.

That will be the case for AbbeyMoor Medical, a company that has invented a temporary stent for men with urinary problems. The firm is based in Parkers Prairie, Minnesota and isn't profitable yet.

"We are officially now in the national launch mode," said CEO John Reid.

Reid said when it comes time to pay the excise tax in 2013, his company will try to offset that cost by raising its product pricing to the extent that it can.

But Medicare is an issue there too.

"Our product is primarily going to be used by Medicare patients," Reid said. "So whatever Medicare is paying and reimbursing for this procedure, we're going to be at their mercy. We're going to have very little ability to negotiate."

So, the medical device tax adds to the struggles of an industry that has been beset in recent years with high-profile product quality problems and legal investigations of its marketing practices.